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Liability Management

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Benefits associated with repurchases or exchanges of debt securities

Perception. A buy back may signal that a company has a positive outlook.

Deleveraging. Recording of accounting gain. Potential EPS improvement. Reducing interest expense. Potential regulatory and ratings benefits. Alternative to more fundamental restructuring or potential

bankruptcy.

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Why now?

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Why now? Business and market realities. Deleveraging efficiently. Tax considerations. Investor perception. Investors may be more willing to consider exchange and restructuring

opportunities. Investors may seek liquidity or appreciate the opportunity to move up in the capital structure.

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How?

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Options Least Documentation Most Documentation

Redemptions

Repurchases

Debt Tenders

Debt for Equity Swaps

Private Exchange Offers

3(a)(9) Exchange Offers

Registered Exchange Offers

Equity for Equity Exchanges

Least Time Consuming

Most Time Consuming

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Options explained Repurchases for cash: Redemptions – purchase of outstanding debt securities for cash in accordance

with their terms; Repurchases – open market or privately negotiated purchases of outstanding

debt for cash; and Tender offers – an offer made to all holders of a series to repurchase outstanding

debt securities for cash.

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Options explained (cont’d)

Non-cash tenders: Exchange offers, including Private exchange offers (4(a)(2)) Section 3(a)(9) exempt exchange offers Registered exchange offers

One-off exchanges Debt for equity swaps Equity for equity exchanges

Consent solicitations

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Choosing among these options Will depend upon the issuer’s objectives Will depend upon the issuer’s financial condition: Distressed exchange “Preventive” liability management Opportunistic transactions

Legal, accounting, ratings, regulatory capital and tax considerations should all be factored into the choice.

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Factors to consider in choosing Cash? If the company has cash on hand, open market repurchases or a tender will be

possible.

No cash? If the company does not have cash on hand, or a repurchase would not be

considered a prudent use of resources, a company should consider an exchange.

Holders? The company will have to consider whether the securities are widely held and the

status (retail versus institutional) of the holders.

Buying back a whole class of debt securities? Open market repurchases will provide only selective or limited relief. A tender

may be necessary to buy all of a class of outstanding bonds.

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Factors to consider in choosing (cont’d) Straight debt? Convertible debt? Hybrid? The company’s options will depend on the structure of the outstanding security. A

repurchase/tender for straight debt typically will be more streamlined.

Tender? Again, the structure and rating of the outstanding security may drive the timing.

Covenants? Is the company concerned about ongoing covenants as well as de-leveraging?

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Factors to consider in choosing (cont’d) Part of a broader effort? The company should consider whether a buyback is only a precursor to a

restructuring or recapitalization or whether an exchange offer/tender is only one element of a bigger process. The company should keep the bigger picture in mind.

Mix and match? Well, not really. It may be possible to structure a variety of transactions.

However, a company should be careful to structure any liability management transactions carefully. Open market repurchases in contemplation of a tender may be problematic.

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Thinking ahead Credit/loan facility terms that contain limitations on prepayments. May be prohibited. May trigger repayment obligations.

Other debt security terms. Requirement to use proceeds for a particular purpose.

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Redemptions

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Redemptions Redeem outstanding debt securities in accordance with their terms,

assuming governing documents do not prohibit redemption. Certain debt securities may have call protection (not redeemable), or limited call

protection (not redeemable for a certain period of time after issuance).

Other debt instruments may prohibit redemption. Indenture usually specifies the procedures. Usually requires notice of not less than 30 nor more than 60 days. Notice should

include redemption date, redemption price and specify which, if not all, securities will be redeemed.

If not all securities are being redeemed, redemption is usually by lot or pro rata.

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Redemptions (cont’d) Indenture usually specifies the redemption price. Typically the redemption price will reflect the holders’ yield to maturity on the

outstanding debt. Redemption price usually equals the face amount, plus the present value of future

interest payments (effectively causing the debt securities to be redeemed at a premium).

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Other considerations Issuer must comply with anti-fraud protections under the securities

laws. Issuers often announce via press release (in connection with

providing the notice of redemption) their decision to redeem outstanding debt securities. An issuer should disclose a redemption prior to contacting debtholders if its

broader impact on the company’s financial condition would be viewed as material.

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Fifth Third SEC issued a cease and desist order against Fifth Third from commiting or

causing violations of Reg FD Fifth Third issued a redemption notice to a series of trust preferred holders,

but did not initially file an 8-K or issue a press release Redemption notice was provided by Fifth Third to DTC (as required) SEC found Fifth Third failed to consider how its decision to redeem would

affect investors in the market for those securities and initially failed to publicly announce the redemption, which the SEC determined was material nonpublic information

The SEC based its determination of materiality on the trading prices (security was trading at $26.50, and it was to be redeemed at $25.00)

Reminder to issuers to consider public disclosures (in addition to disclosures required by indentures) in the case of issuer tenders, repurchases, redemptions, etc.

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Turkle Trust v. Wells Fargo A class action case was brought against Wells Fargo in connection with the

redemption under a capital treatment event of certain outstanding trust preferred securities

In July 2012, a US District Court determined that the Collins Amendment (Sec 171) of the Dodd-Frank Act entitled the bank to redeem at any time following adoption of Dodd-Frank

Bank need not have considered other early redemption provisions contained in the securities nor the phase out provisions for trust preferreds

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Debt Repurchases

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Repurchases A repurchase can be effected a number of ways. The issuer may: Negotiate the purchase price directly; Engage a financial intermediary to negotiate and effect open market repurchases;

or Agree with a financial intermediary to repurchase debt securities that the financial

intermediary purchases on a principal basis.

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Benefits of a repurchase Ability to negotiate purchase price allows issuer to take advantage of

fluctuating market prices; Efficient means of refinancing because it requires little preparation,

limited or no documentation and modest transaction costs; and Effective if the issuer is seeking to repurchase only small percentage

of debt, or if the debt is not widely held.

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Avoiding the tender offer rules

An issuer repurchasing its debt securities, whether in privately negotiated transactions or in open market purchases runs the risk that it may inadvertently trigger the tender offer rules. The tender offer rules were adopted to ensure that issuer and others

conducting tenders for equity securities would be prohibited from engaging in manipulative practices.

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Avoiding the tender offer rules (cont’d)

Tender offer is not defined by statute. Courts apply an eight factor test to determine whether a repurchase is a tender offer: Active and widespread solicitation of public shareholders for the shares; Solicitation is made for a substantial percentage of an issuer’s stock; Offer to purchase is made at a premium over the prevailing market price; Terms of the offer are firm rather than negotiable; Offer is contingent on the tender of a fixed number of shares, often subject to a

fixed maximum number to be purchased; Offer is open only for a limited time; Offeree is subjected to pressure to sell his stock; and Public announcement of a purchasing program concerning the target company

precedes or accompanies rapid accumulation of large amounts of the stock

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Avoiding the tender offer rules (cont’d)

Any discussion of debt tenders should start with these factors. Thus, repurchase programs should be structured: For a limited amount of securities; To a limited number of holders (preferably sophisticated investors); Over an extended period of time (with no pressure for holders to sell); At prices privately and individually negotiated; and With offers and acceptances independent of one another.

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Other considerations

Private transactions with creditors/debtholders can trigger disclosure obligations under Reg FD. When an issuer discloses any material nonpublic information to market

professionals or holders of its securities who may trade on the basis of such information, the issuer must make public disclosure of that information.

An issuer “testing the waters” may trigger this obligation. May be avoided if the recipients of the information are subject to confidentiality

agreements. At what point should an issuer disclose its restructuring activities? If an issuer is engaged in an ongoing repurchase program over an extended

time, disclosure of each repurchase may not be appropriate until the process ends.

Issuer should disclose other material nonpublic information (unreleased earnings, potential changes to credit ratings) prior to engaging in repurchases.

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Other considerations (cont’d)

Repurchases may trigger Regulation M concerns. Rule 102 makes it unlawful for an issuer to “bid for, purchase, or attempt to

induce any person to bid for or purchase, a covered security during the applicable restricted period.”

Repurchases of convertible debt may be deemed a “forced conversion” and thus a distribution of the underlying equity security under Regulation M.

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Debt Tenders

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Tenders for convertible debt Under the tender offer rules, convertible or exchangeable debt

securities are treated like equity securities subject to the rules applicable to equity tender offers (Rule 13e-4). Issuer must file with the SEC a Schedule TO (subject to SEC review). Offer must be made to all holders. “Best price” rule – consideration paid to any holder for securities tendered must

be the highest consideration paid to any other holder for securities tendered. Tender must be announced, usually via Wall Street Journal publication. Tender must include withdrawal rights for offer period – securities may be

withdrawn after 40 business days from commencement. Issuer may not make any purchases (until 10 days after termination of the tender

offer) other than through the tender.

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Tenders for convertible debt (cont’d) Things to consider. Not possible to “sweeten” the tender offer with an early tender premium. Less flexibility than a tender for straight debt.

May have accounting implications. Consider effect on call spread agreements. Tender of convertible debt may be deemed a “forced conversion” and result in a

distribution of the underlying equity for Regulation M purposes.

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Tenders for straight debt securities Tenders for straight debt securities are subject to Regulation 14E,

Rules 14e-1, 14e-2 and 14e-3, but not the additional requirements applicable to equity securities.

A tender offer: May be subject to various conditions to closing, such as receipt of financing or

waivers. Must generally be held open for 20 business days (extended for 10 days if the

amount of securities (provided the amount of securities increase or decreases by more than 2%), consideration or dealer manager’s fee increases or decreases).

Any extension must be announced via press release the day after scheduled expiration and must indicate the number of securities tendered.

An issuer may approach all the holders of a series of outstanding debt securities.

Regulation 14E does not require filing of tender offer documents.

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Other applicable regulations Many issuers of investment grade debt issue securities pursuant to

Euro MTN programs or and offshore pursuant to Reg S. An issuer must not only comply with US regulations, but also with

the laws of the home-country of the holder. Market Abuse Directive prohibits insider trading and requires disclosure. Anti takeover restrictions provide guidance for issuers tendering: All holders must be treated equally; and All holders must have sufficient time and information to enable them to reach

an informed decision.

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Investment grade v. non-investment grade debt Historically, tenders of investment grade debt had been viewed

differently by the SEC than those for non-investment grade debt. For example, prior to recent no-action letter guidance (available for

non-convertible debt, regardless of rating, subject to satisfaction of certain conditions), there were important distinctions between investment grade and non-investment grade: Investment grade debt not subject to the 10- and 20-business day requirements. Issuers of investment grade debt are able to price a tender offer based on a fixed-

spread or a real-time fixed-spread over a benchmark security.

“Hybrids” and trust preferred securities generally considered investment grade debt.

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SEC Guidance Regarding Debt Tender Offers The SEC Staff’s guidance relating to tender offers for non-

convertible debt securities developed through no-action letters and also through more informal interactions Cobbling together no-action letter guidance and reconciling to evolving market

practice resulted in some confusion

In late January 2015, the SEC Staff issued no-action letter guidance applicable to tenders for non-convertible debt and provides for an abbreviated process for investment grade and non-investment grade debt provided that the transaction meets certain conditions. The no-action letter relief will not be available in every debt tender or to

every issuer.

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SEC Guidance Regarding Debt Tender Offers Given that the no-action letter conditions will not be applicable in

every circumstance, it remains important to understand the prior rules.

Following the issuance of the no-action letter, both investment grade and non-investment grade tenders which cannot be conducted in reliance on the no-action letter relief will be subject to the 10- and 20-day requirement.

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A little history…. Historically, tenders for non-convertible, investment grade debt were

not subject to 10- and 20-business day requirements if: Offers to purchase were made for any and all of the debt securities of a particular

series; Offer was open to all record and beneficial holders of the series; Offer was conducted to afford all record and beneficial holders a reasonable

opportunity to participate (including expedited dissemination if offer is open for fewer than 10 days); and

The tender was not being made in anticipation of, or in response to, other tender offers for the issuer’s securities.

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A little history… (cont’d) Tenders for investment grade debt were priced using a fixed-

spread tender. Priced on each day during the offer period by reference to a fixed spread over the

then-current yield on a specified benchmark U.S. Treasury security determined as of the date, or a date preceding the date, of tender;

The offer provided that information about the benchmark security be reported in a daily newspaper of national circulation; and

The offer provided that tendering holders be paid promptly.

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A little history…(cont’d) Tenders for investment grade debt also could be priced using a real-

time fixed-spread. Priced by reference to a stated fixed spread over the most current yield on a

benchmark U.S. Treasury security determined at the time the holder tenders, rather than by reference to a benchmark security as of the date, or at the date preceding the date, of tender.

The offer must: Clearly indicate the benchmark interest rate to be used and must specify the

fixed spread; State the nominal purchase price that would have been payable based on the

applicable yield immediately preceding the commencement of the tender; Indicate the reference source to be used to establish the current benchmark

yield; Describe the methodology used to calculate the purchase price; and Indicate that the current benchmark yield and the resulting nominal purchase

price will be available by calling a toll-free number established by the dealer.

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A little history….(cont’d)

Prior to the No-Action Letter Relief, the rules of the road could be summed up as follows: Investment grade debt:

Generally had to remain open for 7-10 calendar days; Offer was required to be extended 5 calendar days for certain modifications to

terms; Had to be conducted to afford all holders the reasonable opportunity to

participate, including dissemination of the offer material on an expedited basis (within two days after commencement);

Could be priced using a fixed-price spread or a real-time fixed price spread. Non-investment grade debt:

Had to remain open for 20 business days; Offer was required to be extended 10 business days for certain modifications

to terms; Could be priced using a fixed-price spread that is set two days prior to

expiration of the exchange offer.

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Abbreviated Tender Offer Process

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Background No-action letter was issued on January 23, 2015 SEC staff will not recommend enforcement action with respect to

tender or exchange offers for non-convertible debt securities that are held open for as few as five business days (as opposed to the 20 business days required by Rule 14e-1(a)), with potential extensions of as little as five business days following changes in the offered consideration or three business days following changes in other material terms of the offer Letter applies to both investment-grade and non-investment grade

debt securities Supersedes previously issued no-action letters that had allowed

similarly expedited tender or exchange offers only for investment-grade debt securities

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Conditions In order to rely on the relief, offer must: be made for any and all securities of a class or series of non-

convertible debt; be made by (i) the issuer of the securities, (ii) a wholly owned

subsidiary of the issuer or (iii) a parent company of the issuer; involve consideration consisting solely of cash or qualified debt

securities, or a combination of both “Qualified debt securities” are understood to mean non-convertible debt securities

that are (i) identical in all material respects to the targeted debt securities (including as to obligors, collateral, lien priority, covenants and other terms) except for the payment-related dates, redemption provisions and interest rate; (ii) have interest terms payable only in cash; and (iii) a weighted average life to maturity that is longer than that of the targeted debt securities;

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Conditions (cont’d) not be financed with debt that is senior to the subject securities; be open to all record and beneficial holders of the targeted debt

securities, although an exchange offer could be restricted to Qualified Institutional Buyers (as defined in Rule 144A) or non-U.S. persons (within the meaning of Regulation S) so long as other holders of the subject securities have the option to receive cash in an amount equal to the approximate value of the exchange offer consideration; be announced no later than 10:00 a.m., Eastern time, on the first

business day of the five business day period, through a widely disseminated press release, which in the case of an offer by an SEC reporting company must also be furnished almost immediately under a Current Report on Form 8-K; permit tenders through guaranteed delivery procedures;

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Conditions (cont’d)

use benchmark pricing mechanisms; provide for certain withdrawal rights; and not include early settlement features.

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Modifications

Material changes trigger a requirement to extend the offer period Offer period must be extended so that at least five business days

remain from and including the announcement of any change in the offered consideration, and at least three business days remain from and including the announcement of any other material change in the offer An issuer must notify investors of a material change by a widely

disseminated press release, and SEC reporting issuers must file a Form 8-K

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Disqualifying events

The abbreviated tender offer process is not available if the offer is made: in connection with a consent solicitation to amend the documents governing the subject securities; if there is a default or event of default under any of the issuer’s material debt agreements; if the issuer is the subject of bankruptcy or insolvency proceedings or has commenced an out-of-court restructuring or a pre-packaged bankruptcy process; in anticipation of or in response to, or concurrently with, a change of control, merger or other extraordinary transaction involving the issuer;

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Disqualifying events

in anticipation of or in response to a competing tender offer; concurrently with a tender offer for any other series of the issuer’s

securities made by the issuer or certain affiliates if the effect of such offer would result in a change to the capital structure of the issuer (e.g., addition of obligors or collateral, increased priority of liens or shortened weighted average life to maturity of such other series); or in connection with a material acquisition or disposition.

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Important considerations For investment grade debt, prior no-action letters permitted: tender offers for investment grade debt to remain open for as little as seven days

(now, if the conditions are met, the period can be as short as 5 business days) issuers to include an early settlement feature (new no-action letter does not allow

early settlement) issuers to deny withdrawal rights (new no-action letter requires withdrawal rights) consent to be included in conjunction with the tender offer (abbreviated tender

process is not available for an offer that includes an exit consent) payment in cash (new no-action letter permits cash and/or qualified debt securities)

In addition, prior no-action letters: were silent on communication requirements, but the new no-action letter

specifically requires filing of an 8-K did not require guaranteed delivery did not include disqualifying events

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Important considerations

General solicitation would be required to be used in connection with satisfying the condition under the no-action letter that the offer be open to all holders of the subject securities No “waterfall” or “partial” tenders are permitted in reliance on the new

no-action letter Effectively, for an investment grade tender offer that does not qualify

for the new abbreviated tender relief, then, the tender offer will be subject to the more onerous 10- and 20-day period requirements, and, likely also to the new dissemination and related requirements

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Exchange Offers

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Exchange offers If an issuer does not have, or is unable to use, available cash, it may

be prudent to effect an exchange offer. Means of reducing interest payments, reducing principal amount of outstanding

debt securities and managing maturities. Must comply with both the Exchange Act (tender offer rules) and Securities Act

(registration) requirements. Any exchange offer must either be registered with the SEC or be exempt from

registration: Exempt exchange offers rely on Section 4(a)(2) or Section 3(a)(9).

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Private exchange offers Private exchange offers conducted pursuant to Section 4(a)(2) are

subject to limitations: May not constitute a “general solicitation” and must be made only to

“sophisticated investors,” usually qualified institutional buyers (QIBs). Issuers often pre-certify holders to ensure they meet the sophistication standard. Securities issued will not be freely tradable securities: Holders may request registration rights. Holders may sell under Rule 144 (may be able to tack).

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Private exchange offers - process A private exchange offer may be conducted on an abbreviated

timeline. Identify and pre-certify (QIB, accredited investor status) investors; Announce exchange offer; Distribute exchange information (not required to be filed with SEC, not subject to

SEC review); Solicit exchanges and/or consents; May engage a dealer-manager to assist.

Offer period expires; and Close and announce results of exchange offer.

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Lock-ups and registered exchange offers There has always been concern regarding approaching investors

privately in connection with an exchange offer that will be a registered exchange

Has the issuer commenced unregistered offers?

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Lock-up agreements in registered exchange offers The SEC issued guidance on the use of lock-up agreements in registered

exchange offers (the SEC’s Compliance and Disclosure Interpretations for the Securities Act Sections (“C&DIs”)).

►C&DI 139.29: Question: May an issuer contemplating a registered debt exchange offer

execute a lock-up agreement (or agreement to tender) with a note holder before the filing of the registration statement?

Answer: The execution of a lock-up agreement (or agreement to tender) may constitute a contract of sale under the Securities Act. If so, the offer and sale of the issuer's securities would be made to note holders who entered into such an agreement before the exchange offer is made to other note holders.

Recognizing the legitimate business reasons for seeking lock-up agreements in this type of transaction, the staff will not object to the registration of offers and sales when lock-up agreements have been signed in the following circumstances:

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Lock-up agreements in registered exchange offers (cont’d)

the lock-up agreements are signed only by accredited investors; the persons signing the lock-up agreements collectively own less than 100% of

the outstanding principal amount of the particular series of notes; a tender offer will be made to all holders of the particular series of notes; and all note holders eligible to participate in the exchange offer are offered the same

amount and form of consideration. When lock-up agreements are executed before the filing of a registration

statement and the circumstances noted above are not satisfied, the subsequent registration of the exchange offer on Form S-4 may be inappropriate. An exchange offer is a single transaction, and a transaction that has commenced privately must be completed privately. Similarly, if a note holder actually tenders its notes - for example, by signing a transmittal form - before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the note holders because offers and sales have already been made and completed privately. An issuer seeking to lock up note holders must also consider whether such efforts represent the commencement of a tender offer. [Aug. 11, 2010]

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Lock-up agreements in registered exchange offers (cont’d)

►C&DI 139.30: Question: In a negotiated third-party exchange offer, may an acquiring

company execute a lock-up agreement (or agreement to tender) before the filing of the registration statement to obtain a commitment from management and principal security holders of a target company to tender their shares in the exchange offer?

Answer: The execution of a lock-up agreement (or agreement to tender) may constitute a contract of sale under the Securities Act. If so, the offer and sale of the acquiror's securities would be made to persons who entered into such an agreement before the exchange offer is made to other target security holders.

Recognizing the legitimate business reasons for seeking lock-up agreements in the course of negotiated third-party exchange offers, the staff will not object to the registration of offers and sales where lock-up agreements have been signed in the following circumstances:

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Lock-up agreements in registered exchange offers (cont’d)

the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the subject securities of the target company;

the persons signing the lock-up agreements collectively own less than 100% of the subject securities of the target;

a tender offer will be made to all holders of the subject securities of the target; and

all holders of the subject securities of the target eligible to participate in the exchange offer are offered the same amount and form of consideration.

When lock-up agreements are executed before the filing of a registration statement and such agreements exceed the circumstances noted above, the subsequent registration of the exchange offer on Form S-4 may be inappropriate. An exchange offer is a single transaction, and a transaction that has commenced privately must be completed privately. Similarly, if a holder actually tenders its subject securities — for example, by signing a transmittal form — before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the holders of the subject securities because offers and sales have already been made and completed privately. An acquiring company seeking to lock up holders of the subject securities must also consider whether such efforts represent the commencement of a tender offer. [Aug. 11, 2010]

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Section 3(a)(9) exchange offers Section 3(a)(9) exempts from the registration requirements “any

securities exchanged by the issuer with its existing securityholders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.”

Section 3(a)(9) exchange has five requirements: Securities must be of the same issuer SEC will look at the underlying economic reality when examining this issue. SEC provided no-action letter relief for the issuance of a new parent security

in exchange for an outstanding parent security that has one or more “upstream” guarantees from the parent’s 100% owned subs

No additional consideration from holders The securityholder cannot pay anything of value besides the outstanding

security; Rule 149 permits cash payments to effect an equitable adjustment in respect of

interest or dividends paid.

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Section 3(a)(9) exchange offers (cont’d) Exchange must be offered exclusively to the issuer’s existing securityholders An issuer may violate this requirement if conducting a simultaneous offering of

new securities for cash. The issuer must not pay any commission or remunerations for the solicitation of

the exchange; and Must consider the relationship between the issuer and the person furnishing

the services, the nature of the services performed and the method of compensation.

An issuer’s directors, officers and employees may solicit, provided that is not their only role and they receive no bonus for such activities.

Activities by third-parties must be “ministerial” or “mechanical.” The exchange must be made in good faith and not as a means of avoiding

registration.

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Section 3(a)(9) exchange offers (cont’d) Considerations for Section 3(a)(9) exchanges: Securities issued as part of the exchange are subject to the same transfer

restrictions as the original securities. Exchange offer may be “integrated” with other securities offerings conducted in

close proximity to the exchange. Issuer should apply the SEC’s five factor integration test in conducting this

analysis.

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Registered exchange offers Registered with the SEC on a Form S-4 registration statement. Must include descriptions of the securities being offered, the terms of the

exchange offer, description of the issuer, risk factors, and, if applicable, pro forma financial statements.

Commencement may not start until registration statement is declared effective. Rule 162 provides flexibility allowing early commencement provided that no

securities are actually exchanged/purchased until the registration statement is effective and the tender has expired.

Expanded in December 2008 to apply to exchange offers for straight debt provided the offer has withdrawal rights, if a material change occurs, the information is disseminated in accordance with the tender offer rules and the offer is held open for the minimum periods specified in Rule 13e-4 and Regulation 14D.

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Considerations for exchange offers Because an exchange offer involves the offering of new securities,

participants are subject to liability under Section 11 of the Securities Act. If an issuer engages a financial intermediary to assist with solicitation, it may be

subject to statutory underwriter liability and will conduct its own diligence review, and require delivery of comfort letters and legal opinions.

As with a tender offer, an issuer needs to be mindful of Regulation M’s prohibitions on bidding for, or purchasing, its securities when it is engaged in an offer.

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Exchange Offer with a Prepack

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Exchange Offer with a Prepack An issuer may opt to structure a transaction as an exchange offer

with a prepackaged bankruptcy Efficient to seek votes on an exchange and/or for issuer approval to file the

prepack Prepack disclosure requirements to consider “Status” of securities

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Section 1145 of the Bankruptcy Code In the bankruptcy context the “private placement” exemption in

Section 4(a)(2) of the Securities Act may be unavailable. i.e., the issuance of “reorganization securities” to a large class of claim holders

may be insufficiently “private” to fit within the exemption.

Section 1145(a)(1) of the Bankruptcy Code allows a debtor or certain related entities (a successor or affiliate participating in a joint plan with debtor) to offer and sell securities under a plan to creditors without registration under Section 5 of the Securities Act.

To qualify for the registration exemption, the securities must be issued “in exchange for… or principally in exchange for” claims against the issuer.

Section 1145(c) deems an offer or sale of securities in conformity with Section1145(a)(1) to be a “public offering” for Securities Act purposes. Securities received by creditors under Section 1145(a)(1) are freely tradable and

unrestricted.

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Section 1145 of the Bankruptcy Code (cont’d)

Section 1145(a)(2) provides that the offer of a security through any “warrant, option, right to subscribe or conversion privilege” that was made or sold in exchange for a claim against the debtor, or “the sale of a security upon the exercise of such a…” is also exempt under Section 1145. The registration exemption is applicable through Section 1145(a)(2) to the offer of

warrants and the sale of underlying common stock upon exercise of the warrants.

There is an independent obligation of the Bankruptcy Court to determine: Whether a disclosure statement contains adequate information, and Whether the proposed plan of reorganization satisfies Section 1129 of the

Bankruptcy Code, including Section 1129(d) which prohibits confirmation of a plan of reorganization if the Bankruptcy Court determines that the “primary purpose” of the plan of reorganization is to avoid the application of Section 5 of the Securities Act.

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Section 1145 of the Bankruptcy Code (cont’d) Recipients of securities issued in exchange for creditors’ claims under

an approved Chapter 11 plan of reorganization, can resell the securities without registration under the Securities Act, unless the recipient is an “underwriter” within the meaning of Section 1145(b)(1) of the Bankruptcy Code. Resales pursuant to Section 4(1) of the Securities Act.

Section 1145(b)(1) defines an entity as an “underwriter” if such entity: (A) purchases a claim against, interest in, or claim for an administrative expense

in the case concerning the debtor, if such purchase is with a view to distribution of any security received or to be received in exchange for such a claim or interest;

(B) offers to sell securities offered or sold under a plan for the holders of such securities;

(C) offers to buy securities offered or sold under a plan from the holders of such securities, if such offer to buy is (i) with a view to distribution of such securities, and (ii) under an agreement made in connection with a plan, with the consummation of a plan, or with the offer or sale of securities under a plan; and

(D) is an “issuer” with respect to the securities, as the term “issuer” is defined in Section 2(11) of the Securities Act.

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Section 1145 of the Bankruptcy Code (cont’d) Even if a creditor falls within the narrower definition of “underwriter”– as long

as it is not an affiliate of the issuer – Section 1145(b)(1) provides it will not be viewed as an underwriter with respect to “ordinary trading transactions.”

Statutory underwriters may be able to sell securities without registration pursuant to the resale limitations of Rule 144 under the Securities Act.

The emergence of a market for “reorganization securities” may raise some concerns regarding the operation of Section 1145 in facilitating secondary trading, especially in the case of equity securities: The court supervised Chapter 11 process protects initial recipients, not

subsequent purchasers of reorganization securities. No requirement of delivery of disclosure statement for the resale.

Disclosure Statement, unlike a prospectus, is not governed by securities law disclosure regime. Commonly guided by the securities laws in preparation of disclosure

statement. Combined registered exchange offers / pre-packed plans.

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Consent Solicitations

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Consent solicitations May be sought on a standalone basis or coupled with a tender or

exchange offer. Must be permitted under the terms of the governing indenture. The TIA and most indentures do not permit consents that reduce principal or

interest, amend the maturity date, change the form of payment or make other economic changes.

If the amendments involve a significant change in the nature of the investment, it may be considered an issuance of a “new” security.

Why do a consent solicitation? Amend restrictive covenants to permit a potential transaction, such as an

acquisition or reorganization. Modify indenture covenants that restrict or prohibit a restructuring of other debt in

order to preserve “going concern” value and avoid bankruptcy.

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Consent solicitations (cont’d) Concerns Holders may be unwilling to consent to significant modifications because they will

still hold the securities afterward. Typically kept open for 10 business days.

Exit consents are used to change significantly restrictive provisions in connection with a tender or exchange offer. Given by tendering or exchanging holders (who are about to give up their

securities) and bind non-tendering or non-exchanging holders. Act as a useful incentive to avoid the “holdout” problem because non-tendering

and non-exchanging holders are left with securities that have lost most, if not all, of their protections.

An issuer may include a “consent payment” to consenting holders as part of the consideration.

Not subject to any legal framework other than contract law principles.

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Liability Considerations

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Legal challenges A restructuring may result in legal challenges. Usually from non-participating holders who believe the value of their securities or

the protections afforded by the securities has been adversely affected. In addition, because the “all holders” rule does not apply to tender offers for

straight debt securities, holders not offered the right to participate (for example, because the offering is limited to QIBs) may also claim that their securities are impaired.

If the transaction has already been completed, what remedy will be implemented? Holders may no longer hold their securities, holders may hold different

securities.

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Legal challenges (cont’d) Realogy case Realogy Corporation launched an exchange offer for several series of its

outstanding notes for additional term loans issued pursuant to an accordion feature under its senior credit facility.

New loans were secured whereas the old notes were not. The offer set a priority for participation that effectively precluded one class of

notes (the Senior Toggle Notes) from participating. The end result was this class was effectively subordinated to the classes that

were able to exchange. The credit facility permitted only refinancing debt that was not more senior than

the debt being refinanced. The trustee sued and the court interpreted the indenture and credit facility as

prohibiting the transaction. The exchange offer did not proceed.

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Recent court cases Marblegate Asset Management et al. v. Education Management Corp. the issuer, Education Management, had bank debt as well as secured notes

outstanding, which were guaranteed by the issuer’s parent indenture relating to the secured notes provided that the parent guarantee

could be released if a majority of the noteholders consented or if the bank creditors released the parent’s guarantee of the bank debt in an out-of-court restructuring, the issuer and certain of its creditors

consented to a release of the parent’s guarantee of the issuer’s bank debt, foreclosure on the assets of the issuer and its subsidiaries and the foreclosed upon assets would be conveyed by the secured creditor to a new subsidiary that would distribute newly issued debt and equity to the creditors. As part of this restructuring, non-consenting creditors would be left with recourse solely against the issuer and would not receive any debt and equity securities in the restructuring.

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Recent court cases (cont’d)

Court concluded that the plaintiffs failed to establish a basis for injunctive relief but, in dicta, noted that Section 316 of the Trust Indenture Act was likely violated by the out-of-court restructuring arrangement.

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Recent court cases (cont’d) Section 316 provides that: the right of any holder of any indenture security to receive payment

of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder…. The court noted that the section was intended to prevent a holder’s

core rights from being impaired without that holder’s consent. In this case, the restructuring left the noteholders without a source or prospect of recovery

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Recent court cases (cont’d)

Meehancombs Global Opportunities Funds, L.P., et al. v. Caesars Entertainment Corp., et al., the court concluded that an out-of-court restructuring that removed certain parent guarantees of obligations issued under two series of notes was impermissible under Section 316 of the Trust Indenture Act.